Old Republic Reports Results For The Second Quarter And First Half 2018

CHICAGO, July 26, 2018 /PRNewswire/ -- Old Republic International Corporation (NYSE: ORI) today reported the operating and net income amounts shown in the following table. Pretax operating income benefitted from improving underwriting/service income trends for General Insurance in particular, mid-single digit investment income growth, and lower debt interest costs. Post-tax operating income was affected by the same factors and a lower corporate income tax rate, while net income was additionally influenced by variations in realized investment gains and the inclusion, for the first time in 2018, of unrealized investment gains or losses of equity securities. As the consequence of some of these factors, year-over-year reported results are not fully comparable. The table following the Financial Highlights shows the impact of the pertinent factors on period-to-period comparisons.

Financial Highlights (a)

Quarters Ended June 30,

Six Months Ended June 30,

2018

2017

Change

2018

2017

Change

Operating revenues:

General insurance

$

923.0

$

876.7

5.3%

$

1,827.8

$

1,725.7

5.9%

Title insurance

598.6

565.0

6.0

1,122.3

1,092.8

2.7

Corporate and other

10.4

12.0

-13.3

22.1

24.0

-7.8

Subtotal

1,532.2

1,453.8

5.4

2,972.3

2,842.6

4.6

RFIG run-off business

25.1

38.3

-34.4

51.8

79.4

-34.7

Total

$

1,557.3

$

1,492.1

4.4%

$

3,024.2

$

2,922.1

3.5%

Pretax operating income (loss):

General insurance

$

90.7

$

62.7

44.6%

$

174.0

$

156.4

11.2%

Title insurance

60.9

65.0

-6.3

90.4

105.5

-14.3

Corporate and other

7.9

4.8

64.1

14.4

5.9

142.0

Subtotal

159.5

132.6

20.3

278.9

267.9

4.1

RFIG run-off business

13.7

6.8

100.6

24.7

21.3

15.8

Total

173.3

139.4

24.3%

303.7

289.3

5.0%

Pretax investment gains (losses):

Realized from actual sale transactions

32.0

6.8

47.5

21.7

Unrealized from changes in fair value

of equity securities

41.3

-

(110.6)

-

Total realized and unrealized

73.3

6.8

(63.1)

21.7

Consolidated pretax income(loss)

246.6

146.3

240.6

311.0

Income taxes (credits)

48.8

44.6

38.7

96.2

Net income (loss)

$

197.7

$

101.6

94.6%

$

201.8

$

214.7

-6.0%

Components of post-tax diluted earnings per share:

Net operating income (loss):

General insurance

$

0.24

$

0.15

60.0%

$

0.48

$

0.37

29.7%

Title insurance

0.16

0.14

14.3

0.24

0.23

4.3

Corporate and other

0.03

0.03

-

0.06

0.05

20.0

Subtotal

0.43

0.32

34.4

0.78

0.65

20.0

RFIG run-off business

0.04

0.02

100.0

0.07

0.05

40.0

Net operating income (loss)

0.47

0.34

38.2%

0.85

0.70

21.4%

Net realized investment gains (losses)

0.08

0.01

0.12

0.04

Subtotal

0.55

0.35

0.97

0.74

Net unrealized investment gains (losses)

0.11

-

(0.29)

-

Net income (loss)

$

0.66

$

0.35

88.6%

$

0.68

$

0.74

-8.1%

Cash dividends declared per share

$

0.1950

$

0.1900

2.6%

$

0.3900

$

0.3800

2.6%

Ending book value per share

$

17.08

$

17.81

-4.1%

(a) Unaudited / All amounts in this report are stated in millions except per share data and percentages.

Effective January 1, 2018, two significant events have transpired that have a bearing on the year-over-year comparability of consolidated pretax income, as well as post-tax net operating and net income. The first arises from a new rule of the Financial Accounting Standards Board ("FASB") which now requires the inclusion of unrealized investment gains or losses emanating from changes in the fair value of equity (but not fixed maturity) securities in the determination of pre and post-tax income. The second relates to a reduction of nominal Federal corporate income tax rates from 35% to 21%.

To enhance the comparison of earnings among the periods reported upon, the following table shows the effects of the changed corporate income tax rates and the inclusion of unrealized fair value investment gains (losses) on equity securities in 2017 results as if the new rule applied to that year's interim periods.

Amounts for 2017 include the retroactive, "as if" inclusion of unrealized gains or losses on equity securities for that period.

The above and preceding table show both net operating and net income to highlight the effects of realized and, beginning in 2018, unrealized investment gains or losses in equity securities on period-to-period comparisons. Management uses operating income, a non-GAAP financial measure, to evaluate and better explain operating performance, believing that the measure enhances an understanding of Old Republic's core business results. Net operating income, however, does not replace GAAP net income as a measure of total profitability.

The realization of investment gains or losses can be highly discretionary due to such factors as the timing of individual securities sales, the recording of estimated losses from write-downs of impaired securities, tax-planning and tax-rate change considerations, as well as modifications in investment management judgments regarding the direction of securities markets or the future prospects of individual investees or industry sectors. The inclusion, starting in 2018, of market-driven changes in equity investments' valuations will most likely produce greater period-to-period fluctuations in reported net income, particularly at times of significant instability or volatility in the securities markets. In any event, this FASB change has no effect on the management or evaluation of the Company's basic operating results, nor on the determination of such critical elements as current income taxes, debt-to-equity ratios, shareholders' equity, or insurance subsidiaries' ability to pay dividends to the ORI holding company parent.

General Insurance Results – The table below shows the major elements affecting this segment's performance for the interim periods reported upon.

General Insurance Group

Quarters Ended June 30,

Six Months Ended June 30,

2018

2017

Change

2018

2017

Change

Net premiums earned

$

808.5

$

769.5

5.1%

$

1,599.7

$

1,512.3

5.8%

Net investment income

84.4

79.1

6.8

167.7

157.9

6.2

Other income

30.0

28.0

6.9

60.3

55.4

8.9

Operating revenues

923.0

876.7

5.3

1,827.8

1,725.7

5.9

Claim costs

578.1

573.0

0.9

1,144.2

1,100.7

4.0

Sales and general expenses

236.6

225.2

5.0

474.9

437.1

8.6

Interest and other costs

17.5

15.7

11.7

34.6

31.4

10.2

Total operating expenses

832.3

814.0

2.3

1,653.8

1,569.3

5.4

Pretax operating income (loss)(a)

$

90.7

$

62.7

44.6%

$

174.0

$

156.4

11.2%

Claim ratio

71.5%

74.5%

71.5%

72.8%

Expense ratio

25.5

25.6

25.9

25.2

Composite underwriting ratio

97.0%

100.1%

97.4%

98.0%

(a)

In connection with the run-off mortgage guaranty ("MI") and consumer credit indemnity ("CCI") combination, $- and $0.5 of pretax operating gains for the second quarter and first half of 2018, and $12.1 and $16.6 of pretax operating losses for the second quarter and first half of 2017, respectively, were retained by certain general insurance companies pursuant to various quota share and stop loss reinsurance agreements. All of these amounts, however, have been reclassified such that 100% of the CCI run-off business is reported in the RFIG run-off segment.

With few exceptions, earned premiums grew for most types of coverages and markets served. The aggregating effects of recent years' and continuing premium rate increases for several insurance products, along with new business production were main contributory elements to the higher premium levels. Growth stemmed primarily from commercial automobile (trucking), national accounts, auto warranty, and the various coverages offered by a new underwriting facility established in early 2015. Net investment income gained moderately in the context of a relatively stable invested asset base and fundamentally unchanged yield environment.

As the table below indicates, year-over-year claim ratios trended down in this year's first half. Better performance was driven by Old Republic's large books of workers' compensation and commercial automobile (trucking) coverages in particular. The downturn in this largest of cost elements was aided by slightly lower estimates of current year claim provisions, and a lessened impact from unfavorable development of prior years' reserve estimates.

As this year is progressing, the expense ratio is staying aligned with revenue trends.

Quarterly and even annual claim provisions, and the trends they display may not be particularly meaningful indicators of future outcomes for Old Republic's liability-oriented mix of business. Absent significant economic and insurance industry dislocations in the foreseeable future, it is currently anticipated that reported claim ratios can be expected to fall within targeted averages in the high 60 to low 70 percent range. The current mix of business should reflect an expense ratio ranging between 23 and 25 percent.

Title Insurance Results – Operating results for 2018's interim periods were for the most part affected by slower growth of premiums and fees revenues, while claim costs and general expenses grew at a relatively quicker pace.

Title Insurance Group

Quarters Ended June 30,

Six Months Ended June 30,

2018

2017

Change

2018

2017

Change

Net premiums and fees earned

$

588.9

$

555.6

6.0%

$

1,102.8

$

1,073.6

2.7%

Net investment income

9.5

9.2

3.3

19.0

18.7

1.4

Other income

0.1

0.1

20.1

0.4

0.4

8.6

Operating revenues

598.6

565.0

6.0

1,122.3

1,092.8

2.7

Claim costs

17.0

11.2

51.1

29.9

22.2

34.4

Sales and general expenses

519.6

486.6

6.8

999.4

960.7

4.0

Interest and other costs

1.1

2.0

-44.2

2.4

4.2

-43.0

Total operating expenses

537.7

499.9

7.6

1,031.8

987.3

4.5

Pretax operating income (loss)

$

60.9

$

65.0

-6.3%

$

90.4

$

105.5

-14.3%

Claim ratio

2.9%

2.0%

2.7%

2.1%

Expense ratio

88.2

87.6

90.6

89.4

Composite underwriting ratio

91.1%

89.6%

93.3%

91.5%

2018 year-over-year comparisons of revenues from title premiums and fees reflected mid-single digit growth paced by independent agents' production and a slower rise in directly-produced business. By contrast, claim costs trended higher as favorable development of prior years' claim reserve estimates edged down. The following table shows recent trends in reported claim ratios, and the impact on each calendar period of (favorable) or unfavorable developments of prior years' claim reserve provisions:

As the first table above indicates, net investment income was essentially flat as both invested asset balances and investment yields remained relatively unchanged. The operating expense ratio was within range of expectations for this segment's current business environment.

RFIG Run-off Business Results – 2018 performance was in line with the anticipated decline of insured risk in force and concomitant reduction in net premiums earned.

RFIG Run-off Business

Quarters Ended June 30,

Six Months Ended June 30,

2018

2017

Change

2018

2017

Change

A. Mortgage Insurance (MI)

Net premiums earned

$

19.2

$

29.1

-33.9%

$

40.2

$

60.5

-33.5%

Net investment income

5.2

5.0

3.1

10.3

10.3

0.4

Claim costs

6.2

10.3

-39.2

17.7

21.3

-16.6

Pretax operating income (loss)(a)

$

13.8

$

19.3

-28.4%

$

24.6

$

38.7

-36.4%

Claim ratio

32.7%

35.5%

44.2%

35.2%

Expense ratio

22.3

15.3

20.2

17.7

Composite underwriting ratio

55.0%

50.8%

64.4%

52.9%

B. Consumer Credit Indemnity (CCI)

Net premiums earned

$

0.4

$

3.7

-88.7%

$

0.8

$

7.9

-89.5%

Net investment income

0.2

0.3

-32.7

0.4

0.6

-32.6

Claim costs

0.3

15.9

-97.6

0.3

24.8

-98.5

Pretax operating income (loss)(a)

$

(0.1)

$

(12.5)

98.9%

$

-

$

(17.4)

100.3%

Claim ratio

91.2%

425.8%

44.6%

311.0%

Expense ratio

95.7

17.4

101.5

15.5

Composite underwriting ratio

186.9%

443.2%

146.1%

326.5%

C. Total MI and CCI run-off business:

Net premiums earned

$

19.6

$

32.9

-40.2%

$

41.0

$

68.4

-40.0%

Net investment income

5.4

5.3

0.8

10.8

10.9

-1.6

Claim costs

6.6

26.3

-74.6

18.1

46.1

-60.6

Pretax operating income (loss)(a)

$

13.7

$

6.8

100.6%

$

24.7

$

21.3

15.8%

Claim ratio

33.9%

80.0%

44.2%

67.4%

Expense ratio

23.9

15.6

21.9

17.5

Composite underwriting ratio

57.8%

95.6%

66.1%

84.9%

(a)

In connection with the run-off mortgage guaranty ("MI") and consumer credit indemnity ("CCI") combination, $- and $0.5 of pretax operating gains for the second quarter and first half of 2018, and $12.1 and $16.6 of pretax operating losses for the second quarter and first half of 2017, respectively, were retained by certain general insurance companies pursuant to various quota share and stop loss reinsurance agreements. All of these amounts, however, have been reclassified such that 100% of the CCI run-off business is reported in the RFIG run-off segment.

Operating results of the run-off MI and CCI business reflect the expected, continuing drop in net earned premiums from declining risk in force. For the CCI coverage in particular, the much lower premiums in this year's interim periods resulted mostly from the elimination of a major bank business relationship which had been a significant source of both earned premiums and litigated claim costs. The ratios of MI incurred claim costs to earned premiums were reduced by 37.9 and 32.5 percentage points in this year's second quarter and first half, respectively. For the same respective periods of 2017, the reductions amounted to 27.0 and 31.1 percentage points. In each instance, the reductions reflect favorable developments of prior years' claim reserves.

The much more favorable CCI claim ratios for this years' second quarter and first half reflect the absence of the aforementioned litigation-induced claim costs which had burdened this book of business for many years through 2017's third quarter. During the latter period, provision was made for the final settlement and probable disposition of all known litigated and other claim costs incurred during the Great Recession years and their aftermath.

Corporate and Other Operations – The combination of a small life and accident insurance business and the net costs associated with operations of the parent holding company and its internal services subsidiaries usually produce highly variable results. Earnings variations posted by these operations stem from volatility inherent to the small scale of the life and accident insurance line, net investment income, and net interest charges pertaining to external and intra-system financing arrangements. This year's second quarter and first half results were enhanced by the elimination of interest costs related to outstanding debt converted into ORI common stock in March. The interplay of these various operating elements is summarized in the following table:

Corporate and Other Operations

Quarters Ended June 30,

Six Months Ended June 30,

2018

2017

2018

2017

Net life and accident premiums earned

$

3.0

$

4.7

$

6.9

$

9.4

Net investment income

7.4

7.3

15.2

14.6

Other operating income

-

-

-

-

Operating revenues

10.4

12.0

22.1

24.0

Claim costs

5.5

4.2

9.0

9.2

Insurance expenses

1.0

1.7

2.4

5.5

Corporate, interest and other expenses - net

(4.0)

1.3

(3.7)

3.2

Total operating expenses

2.5

7.2

7.7

18.0

Pretax operating income (loss)

$

7.9

$

4.8

$

14.4

$

5.9

Consolidated Results – The above summarized operating results of Old Republic's segmented business are reflected in the following consolidation of accounts.

Consolidated operating cash flow was additive to investable funds and operating needs in the amount of $287.3 and $259.0 for the first six months of 2018 and 2017, respectively. Excluding inherently negative operating cash flows in the RFIG run-off business, these amounts would have been $307.4 and $319.9, respectively.

The sum-total of Old Republic's segmented results is represented by the following major components of pretax consolidated income:

Cash, Invested Assets, and Shareholders' Equity – The table below shows Old Republic's consolidated cash and invested assets as well as the shareholders' equity balances at the dates shown.

Cash, Invested Assets, and Shareholders' Equity

% Change

June 30,

December 31,

June 30,

June '18/

June '18/

2018

2017

2017

Dec. '17

June '17

Cash and invested assets:

Invested assets, carried at fair value

$

12,015.8

$

12,468.9

$

12,156.3

-3.6%

-1.2%

Held to maturity, carried at amortized cost

1,056.2

1,067.4

1,071.7

-1.1

-1.4

Total per balance sheet

$

13,072.0

$

13,536.4

$

13,228.0

-3.4%

-1.2%

Total at original cost for all

$

12,643.1

$

12,783.4

$

12,514.4

-1.1%

1.0%

Shareholders' equity:

Total

$

5,103.4

$

4,733.3

$

4,650.8

7.8%

9.7%

Per common share

$

17.08

$

17.72

$

17.81

-3.6%

-4.1%

Composition of shareholders' equity per share:

Equity before items below

$

16.37

$

16.26

$

16.37

0.7%

- %

Unrealized investment gains (losses) and other accumulated comprehensive income (loss)

0.71

1.46

1.44

Total

$

17.08

$

17.72

$

17.81

-3.6%

-4.1%

Segmented composition of shareholders' equity per share:

Excluding run-off segment

$

15.63

$

16.14

$

16.44

-3.2%

-4.9%

RFIG run-off segment

1.45

1.58

1.37

Consolidated total

$

17.08

$

17.72

$

17.81

-3.6%

-4.1%

Old Republic's invested assets portfolio is directed in consideration of enterprise-wide risk management objectives. Most importantly, these are intended to ensure solid funding of the insurance subsidiaries' long-term obligations to policyholders and other beneficiaries, as well as the long-term stability of the subsidiaries' capital accounts. To this end, the investment portfolio contains no significant insurance risk-correlated asset exposures to real estate, mortgage-backed securities, collateralized debt obligations ("CDO's"), derivatives, hybrid securities, or illiquid private equity and hedge fund investments. Moreover, the Company does not engage in hedging or securities lending transactions, nor does it invest in securities whose values are predicated on non-regulated financial instruments exhibiting amorphous or unfunded counter-party risk attributes.

As of June 30, 2018, the consolidated investment portfolio reflected an allocation of approximately 75% to fixed-maturity and short-term investments, and 25% to high quality, dividend-paying equity securities. The asset quality of the fixed maturity portfolio has remained at high levels.

Changes in shareholders' equity per share are reflected in the following table. As shown, these resulted mostly from net income, dividend payments to shareholders, and changes in the value of invested assets carried at fair value.

(a) Full year 2017 includes a special cash dividend of $1.00 per share.

Capitalization – The following table shows the components of ORI's total capitalization. The most significant change during the fiscal twelve-months ended June 30, 2018 relates to the completed conversion of the 3.75% convertible senior notes into ORI common stock in March 2018.

Capitalization

June 30,

December 31,

June 30,

2018

2017

2017

Debt:

3.75% Convertible Senior Notes due 2018

$

-

$

470.6

$

548.6

4.875% Senior Notes due 2024

396.5

396.2

395.9

3.875% Senior Notes due 2026

545.4

545.1

544.8

ESSOP debt

-

4.2

4.2

Other miscellaneous debt with an average yield of 3.13%

32.4

32.4

32.4

Total debt

974.4

1,448.7

1,526.1

Common shareholders' equity

5,103.4

4,733.3

4,650.8

Total capitalization

$

6,077.9

$

6,182.0

$

6,176.9

Capitalization ratios:

Debt

16.0%

23.4%

24.7%

Common shareholders' equity

84.0

76.6

75.3

Total

100.0%

100.0%

100.0%

Managing Old Republic's Insurance Business for the Long-Run

The insurance business is distinguished from most others in that the prices (premiums) charged for various insurance products are set without certainty of the ultimate claim costs that will emerge, often many years after issuance and expiration of a policy. Old Republic's business is therefore conducted with a primary focus on achieving favorable underwriting results over cycles, and on the maintenance of financial soundness in support of its insurance subsidiaries' long-term obligations to insurance beneficiaries.

In this light, the Company's affairs are managed for the long run and without significant regard to the arbitrary strictures of quarterly or even annual reporting periods that American industry must observe. In Old Republic's view, such short reporting time frames do not comport well with the long-term nature of much of its business. Management therefore believes that the Company's operating results and financial condition can best be evaluated by observing underwriting and overall operating performance trends over succeeding five- or preferably ten-year intervals. A ten-year period in particular can likely encompass at least one economic and/or underwriting cycle and thereby provide an appropriate time frame for such cycle to run its course, and for premium rate changes and reserved claim costs to be quantified and emerge in financial results with greater finality and effect.

Accompanying Financial Data and Other Information:

Summary Financial Statements and Common Stock Statistics

About Old Republic

Safe Harbor Statement

Financial Supplement:

A financial supplement to this news release is available on the Company's website: www.oldrepublic.com